Cash for Clunkers Duel: Edmunds vs the White House

On October 28, Edmunds posted a press release: “Cash for Clunkers Results Finally In: Taxpayers Paid $24,000 per Vehicle Sold, Reports Edmunds.com.” Edmonds explains the process it used to arrive at incremental vehicle sales from Cash for Clunkers incentives, and then calculated the average cost per vehicle.

On the White House blog, Edmunds has been attacked for for its analysis of the real cost of the Cash for Clunkers program that determined the cost of the program to be $24,000 per vehicle. In an October 29 blog post, Senior White House propagandists announced that on the very day they discovered that motor vehicle output added 1.7% to economic growth in the third quarter, which is the “largest contribution to quarterly growth in over a decade,” Edmunds popped its bubble when it unleashed its press release “suggesting that the Cash for Clunkers program had no meaningful impact on our economy or on overall auto sales.” The blog post even goes so far as to call the Edmunds analysis a “space suit” approach.

Though I am always highly skeptical of any of these studies, Edmunds takes the position that it is just trying to understand the true state of auto sales in the U.S. outside of the crazed incentives offered through the Clunkers program. Also, while the government has a very clear agenda to fulfill, Edmunds only has the purpose of weeding out market distortions – such as government intervention – to arrive at normalized sales data for the auto industry. In a follow-up to the White House comments, Edmunds responded:

Apparently, the $24,000 figure caught many by surprise. It shouldn’t have. The truth is that consumer incentive programs are always hugely expensive when calculated by incremental sales — always in the tens of thousands of dollars. Cash for Clunkers was no exception.

The argument is over understanding how many cars that were sold under the Clunkers program were pulled ahead from future months. While Edmunds uses a seasonally adjusted annual rate, the government’s blogger takes a hilarious anecdotal approach and claims that the Edmunds analysis is flawed because it 1) ignores people who were drawn into dealerships and bought cars in spite of the fact that they did not qualify for the incentive, and 2) ignores the GDP rise in the 4th quarter from automakers ramping up production to replace sold inventory. Who is wearing the space suit? Additionally, there are some amusing statements put forth in the “Economic Analysis of the Car Allowance Rebate System (“Cash for Clunkers”)” report released by the Council of Economic Advisors (CEA).

The Car Allowance Rebate System (CARS) 1 is one of several stimulus programs whose purpose is to shift expenditures by households, businesses, and governments from the future to the present. (Other programs with the same motivation include support for bringing forward future infrastructure investments, and accelerated depreciation to bring forward business investment.) Such time-shifting is valuable in a recession, when the economy has an abundance of unemployed resources that can be put to work at low net economic cost; even conservative economists such as Martin Feldstein, Chairman of the Council of Economic Advisers (CEA) under President Reagan, have endorsed this logic for stimulus spending. The benefits of such expenditure-shifting programs are particularly clear when the induced spending is in an industry (like the automotive industry) with a disproportionately large amount of unemployed resources. An additional benefit specific to the CARS program is that bringing forward the replacement of dirty (high-polluting) “clunker” motor vehicles by cleaner, high-efficiency vehicles means there will be less pollution over some time period.

The government’s report also makes the point that GM, Ford, Honda and Chrysler all increased production through the end of the year, which is another sign of growth beyond just the 3rd quarter spike. This is in spite of the fact that it admits that some of the Clunkers program car sales were merely pulled forward from future months or delayed in June, the month previous to the program’s start-up. It’s safe to say that most of this step-up in production is making up for delayed purchases (people who were going to buy a car waited until Clunkers passed congress before they bought a car) and the sales that would still have occurred in later months in the absence of the Clunkers program.

But I will give Big Guv its due and say, yes, of course there will be additional sales when you stand at the entrance of auto dealerships waving $4,500 checks in the faces of people who like to spend money and buy new stuff. Of course, some of these sales would not have taken place otherwise. And Edmunds calculated that amount to be 125,000 incremental sales. Yet, in its usual make-believe fashion, the government, in its CEA report, goes on to write that there are all sorts of really good effects of Cash for Clunkers that cannot be measured (such as consumer perceptions!), while it quietly admits to the numerous economic distortions the program would trigger:

There are other even more difficult-to-measure effects of the program. For example, a perception that the program has helped the economy turn the corner out of recession could have had a real effect on consumer sentiment, market risk spreads, and other determinants of demand. And news reports have suggested that increasing showroom traffic associated with the program has generated some extra sales to buyers who were not eligible to participate. A number of other possible impacts would be even more problematic to quantify, such as any consequences from the reduction in charitable donations of used automobiles, any increase in the price of the remaining not-traded-in clunkers caused by a reduced supply of such vehicles, and the effects on demand for the services of the auto salvage and auto repair industries.

Further effects that we have left out could undoubtedly be imagined. Some of them might even be substantial. But none seem likely to rival the size of the first-round effects that we believe should serve as the starting point for understanding the economic impact of the program.

While the government claims that Edmunds takes a space suit approach, the CEA uses terminology such as “none seem likely” and “what we believe should serve” to support its wild claims. Then it offers up this tripe:

Our analysis leaves out a variety of effects that might modify the conclusions somewhat. For example, even for an auto sale that is borrowed from the distant future, the net effect on the consumer’s total spending may be less than the direct effect on auto spending, because a consumer who purchases a new vehicle under the CARS program will likely need to trim spending in other areas to make up for the extra automotive outlay. However, standard economic theory suggests that the reduction in non-auto spending should be spread out smoothly over time and will thus mostly occur after the economy has returned to normal.

What the report does not mention is that this program involved the allocation of funds to a specified industry that served to boost the government’s union constituency, and additionally, the Obama administration set the rules for allowable purchases under strict guidelines that induced the consumer to purchase smaller, more “green friendly” automobiles that conform to its long-term, environmental ambitions. Yet this political redistribution was disguised and sold as a stimulus to the economy. See my Cash for Clunkers piece here.

4 Responses to Cash for Clunkers Duel: Edmunds vs the White House

clark says:

November 2nd, 2009 at 8:36 am

Wow, I had no idea this was going on (the Edmunds truth seeking) it’s as if a slick-backed car dealer was trying to say that Edmunds was wrong about the value of an over-priced car the dealership was selling, who is going to win that contest? Edmunds has clout amongst the public, IMHO, more-so than any dealership or salesperson, and even the White House. [What's the Bluebook value? You don't turn to the government to determine such a question!] Lots of people will pay attention to this. I expect Edmunds will either be bought by the government and the executives replaced or a regulatory board will close Edmunds down, or some such, after all this. Isn’t that the way the Soviets would have treated those who spoke out against the empire?

Jeannie Queenie says:

November 2nd, 2009 at 4:00 pm

When I first wrote a couple days ago about the $24,000 loss per auto uncle sam took on the Cash for Clunkers, I had yet to read of another one of their hairbrained ideas that would appeal to the Florida Senior set. That is a program called Cash for Clubbers…yep, no kidding. You can check out the story in the WSJ on October 17, page A12. All about Congress’s grand golf cart stimulus. You got to give it to these guys, for they sure do have balls, that is, of the golfing variety, to pull off somthing like this..what will be next? I guess that there are folks, especially those who reside at The Villages in Florida who did partake of this other joke on americans. At the Villages all you see are seniors driving their carts to and from grocery stores or restaurants within this 12 sq mile compound. I laughed my head off when I first saw this three years ago, but I guess it is a gas saver and in a way it’s like riding in a convertible, only much smaller. Some of those carts can get pretty fancy. But what is goofy about this stimulus via golf carts, is that many of the carts qualifying for subsidies are Chinese imports made by Chinese workers. With that in mind one wonders about the trillion idiotic other failures to come in other stimulus bills our politicians proudly admit they don’t read, but vote on them anyway.. Details of the federal tax credit are available on the IRS’s web site at http://www.irs.gov/irb/2009-26_IRB/ar07.html. A typical electric golf cart ranges from $7,000 to $10,000, which means if you live in Oklahoma where the 50% Oklahoma credit is combined with the federal credit these “cars” indeed are essentially free. But that is just part of this silly story..it gets even better in the days of Crap and Trade. Just when you think these bozos are for real re: ecosystem, you find out this which I gleaned from the WSJ page on this topic regarding fallout of carts…”Upstream emissions are only the beginning of the story. The typical electric golf cart uses six to eight lead-acid batteries. Each is about the size of a typical car battery, and has to be replaced every three to five years. These batteries are extremely toxic. According to the Connecticut Department of Environmental Protection: “If handled improperly, lead acid batteries removed from vehicles pose certain hazards. Battery components are toxic and corrosive, and can also be a fire and explosion hazard. Lead and sulfuric acid can contaminate the air, soil and water. Direct contact with sulfuric acid can burn the skin and eyes. Exposure to lead in the environment can pose a serious health hazard to children. Lead is also very toxic to aquatic life.” http://www.ct.gov/dep/lib/dep/p2/vehicle/batteriesleadccid.pdf. So there you have it folks, get a credit for a golf cart that toxifies the air, and also pay up the wazoo for Crap and Trade….like I said 2 days ago about the Clunker really costing $24,000 per car, now we can add the cost of Clunker Clubbers in sort of a triple whammy…1) bigtime credit, in some cases amounting to almost a free cart like in Okie..and then, 2)giving the sale to a Chinese cart maker, and 3) adding to the toxins in the air, both from us and our friends in the Orient. A 75 yr old CA senior with a sense of humor laughs…”.This golf cart really moves. 25 mph on the street and on the course. It has a windshield with wiper or optional split screen windshield; standard golf cart set up or optional passenger seating; woodfired pizza oven (just kidding); and this nice tax credit. Eat your heart out those of you helping me buy this cart.”
I think we should be eating out the hearts of the morons advocating all these totally asinine programs which obviously are loopty loop.

Tom Osborne says:

November 2nd, 2009 at 5:02 pm

I admit to not being a fully sophisticated Austrian economic analyst, but from seeing those photos you linked to of reasonably serviceable cars being destroyed, “Cash For Clunkers” seems to me to have been yet another example of the “broken window” fallacy. I asked my genius car mechanic (very successful and skillful) what he thought of the program, and he likened it to a “mini real estate bubble,” in that if people really were driving clunkers, then that meant they couldn’t afford a new car, and the few thousand dollars that the government offered merely lured them into a debt they couldn’t take on, so look out for all the repo men who will be springing into action after a while. I think the people who fell for this program are those who can’t pass up anything touted as “free”. The only person I know who utilized this program used it to get rid of a second car she hardly ever drove, to get a new second car she will hardly ever drive. She lives alone and one car really is enough. Now she spent $17,000 that would have paid off her mortgage. I said her, “You could have paid off your mortgage? Then why did you buy this car you didn’t need?” Her answer: “The government was giving away $3,500!”

Mark Aster says:

November 3rd, 2009 at 6:50 am

Earlier this past summer when Karen first wrote about “Clunkers,” I referred to the program as the “Future Repossed Vehicles of America Act.” Financial analysts like Karen analyze what people ought to do with their money. As an insolvency law professional, I analyze what people (in the words of an old Mel Brooks song) “oughtn’t do, but you do anyway.” In addition to Edmunds, pay close attention to the number of vehicles that will show up in Chapter 7 and 13 bankruptcies over the next few months. Many working class people of straightened means, and even more straigthened thought processes, were encouraged to take on unnecessary debt in a massive recession with an unstable labor market in the name of “green change.” I expect to see a lot of these vehicles under the category of “Surrendered” to creditor in Chapter 7 filings. The sad thing is that for people who only qualify for Chapter 13 filing (post-2005), buying a car within roughly three years of filing (910 days) means generally that the whole loan will be treated as secured as opposed to the loan minus the fair market of vehicle being treated as unsecure, and you can expect to pay for the whole shebang. To paraphrase ol’ Lucifer himself, Greenspan, much federal economic policy and consumer behavior just keeps showing up as cascading cross-stupidity.